What's Fair?http://www.unfairtradepracticesnc.comA Blog on the Law of Unfair and Deceptive Trade Practicesen-USTue, 12 Dec 2017 11:33:08 PSThttps://wordpress.org/?v=4.9.1hourly1http://www.elliswinters.com/assets/ew_llc_logo.pngEllis & Winters LogoNCUTPBloghttps://feedburner.google.comWhen Does a Business Dispute That Involves a Third Party Remain “Internal” for Purposes of an Unfair and Deceptive Trade Practice Claim?http://feedproxy.google.com/~r/NCUTPBlog/~3/Gp_WCY1n1PE/Unfair Trade PracticesGeorge SandersonTue, 12 Dec 2017 04:55:58 PSThttp://www.unfairtradepracticesnc.com/?p=1612The North Carolina Business Court has issued several opinions this year that examine the contours of the “internal business affairs” doctrine. As we have explained in prior posts, North Carolina courts have recognized that internal business disputes are exempt from N.C. Gen. Stat. § 75-1.1 because they are not “in or affecting commerce.”

This post examines why the Court in JS Real Estate decided that the dispute was an internal business matter, even though the defendant diverted funds to a third party.

The Parting of the Ways

The JS Real Estate case arose from the aftermath of a messy business divorce between two investors, James Shaw and Raymond Gee.

Shaw and Gee were members in multiple entities that owned and managed commercial real estate. Shaw and Gee were also members in companies that supervised the day-to-day management of those entities.

After several years, Shaw and Gee decided to end their business relationship. Shaw and Gee executed a formal Separation Agreement in order to divide their interests. The Separation Agreement explicitly provided that proceeds from their prior business affairs would be shared equally, but that Gee and his wholly owned company would manage the assets.

After the execution of the Separation Agreement, Gee replaced the firms that provided supervisory services with a company that Gee solely owned, GVest Capital. GVest imposed a new management fee that it collected before any distributions were paid to Shaw and Gee.

Shaw, through his real estate company, claimed that Gee’s installation of GVest violated the terms of the Separation Agreement. Shaw alleged that the management fees GVest collected should have instead been distributed equally to Shaw and Gee.

Shaw’s real estate company sued Gee and Gee’s real estate company for breach of the Separation Agreement, breach of fiduciary duty, constructive fraud, and for committing an unfair or deceptive trade practice in violation of section 75-1.1. Shaw designated the case to the Business Court upon filing.

After discovery closed, Shaw moved for partial summary judgment as to the breach-of-contract claim. At the same time, Gee moved for partial summary judgment on the claims for breach of fiduciary duty, constructive fraud, and violation of section 75-1.1.

The Business Court issued an opinion on the cross motions for summary judgment. The only claim that the Court disposed of was the section 75-1.1 claim. The Court dismissed the section 75-1.1 claim because it viewed the matter as an internal business dispute.

The Fundamental Character of the Dispute Was Internal

In briefing summary judgment, Shaw argued that the matter was not solely an internal business matter because Gee’s conduct involved “commercial interactions” with an outside market participant, i.e. the company to which funds were allegedly diverted, GVest.

Shaw argued that the North Carolina Supreme Court case of Sara Lee Corp. v. Carter was controlling precedent. In Sara Lee, the Supreme Court held that an employee violated section 75-1.1 by engaging in self-dealing when he sold computer parts and services to his employer from companies that the employee owned.

Gee countered that all of the alleged conduct was “encompassed within the rubric of the management and ownership” of the entities that Shaw and Gee jointly owned.

Gee argued that a different North Carolina Supreme Court case, White v. Thompson, controlled. In White, the Supreme Court held that a partner’s alleged misconduct in diverting work to a new business away from the partnership was not “in or affecting commerce” because the partner only breached his duty “as a partner in this single market participant.”

Weighing the two lines of precedent, the Court characterized the dispute between Shaw and Gee as a dispute between members over the internal management of, and right to receive distributions from, the companies of which they were members. Ultimately, the court decided that the facts at hand were more analogous to those presented in White than in Sara Lee.

The Court decided that third-party GVest’s collection of the new management fees did not change the “fundamental character” of the dispute as an internal business matter. In the Court’s estimation, GVest’s alleged involvement was more accurately classified as a “misappropriation of corporate funds within a single entity rather than commercial transactions between separate market participants.”

The Court further noted that White itself involved a partner diverting work towards his own business and away from the partnership.

How Involved are Third Parties?

The Business Court’s decision in JS Real Estate suggests that the determination of whether the internal business doctrine applies is often intensely fact-specific. Practitioners should note well, however, that the Court looked at the fundamental character of the dispute and still determined that the doctrine applied, notwithstanding the “tangential involvement” of third parties. Plaintiffs and defendants alike should assess what conduct lies at the core of the dispute when analyzing whether a section 75-1.1 claim is truly in or affecting commerce.

]]><p>The North Carolina Business Court has issued several opinions this year that examine the contours of the “internal business affairs” doctrine. As we have explained in prior posts, North Carolina courts have recognized that internal business disputes are exempt from &#8230; <a href="http://www.unfairtradepracticesnc.com/business-dispute-involves-third-party-remain-internal-purposes-unfair-deceptive-trade-practice-claim/">Continue reading <span class="meta-nav">&#8594;</span></a></p>
<p>The post <a rel="nofollow" href="http://www.unfairtradepracticesnc.com/business-dispute-involves-third-party-remain-internal-purposes-unfair-deceptive-trade-practice-claim/">When Does a Business Dispute That Involves a Third Party Remain &#8220;Internal&#8221; for Purposes of an Unfair and Deceptive Trade Practice Claim?</a> appeared first on <a rel="nofollow" href="http://www.unfairtradepracticesnc.com">What&#039;s Fair?</a>.</p>http://www.unfairtradepracticesnc.com/business-dispute-involves-third-party-remain-internal-purposes-unfair-deceptive-trade-practice-claim/feed/0http://www.unfairtradepracticesnc.com/business-dispute-involves-third-party-remain-internal-purposes-unfair-deceptive-trade-practice-claim/Playing Chicken with Claims for Unfair Trade Practiceshttp://feedproxy.google.com/~r/NCUTPBlog/~3/12A8VZcAYko/Unfair Trade PracticesStephen FeldmanTue, 28 Nov 2017 04:55:16 PSThttp://www.unfairtradepracticesnc.com/?p=1600The past year has seen several notable decisions concerning how choice-of-law regimes can affect the viability of a claim for violation of N.C. Gen. Stat. § 75-1.1.

Today’s post involves another case on this topic.

In Koch Foods, Inc. v. Pate Dawson Company, a federal district court assessed a claim for unfair trade practices by the seller of processed poultry against directors and officers of a distributor that bought the seller’s poultry.

This post studies the court’s meaty decision.

I’ll Buy, But Who’s Paying?

Koch sold processed poultry to Pate Dawson Company. Dawson, in turn, sold the poultry to restaurants. Its top customer was Bojangles.

When Dawson delivered the poultry to Bojangles, Bojangles would pay Dawson the cost of the poultry, plus the cost of shipping. Dawson would then pay Koch a portion of what Dawson received from Bojangles.

In September 2015, Bojangles ended its relationship with Dawson. That decision put Dawson in financial peril.

After Bojangles cut the cord, however, Dawson continued to order poultry from Koch. In the three months following the end of its relationship with Bojangles, Dawson placed 38 orders with Koch for products worth $3.6 million.

Dawson paid the first $106,000 of that amount, but no more.

Koch then sued Dawson and the company’s officers. Koch alleged that the officers never intended to pay for the $3.6 million in poultry. Koch’s claims included a claim for unfair and deceptive trade practices.

Koch settled its claims with Dawson, but not its claims with the officers. Koch and the officers each moved for summary judgment on the claim for unfair trade practices.

A Most Significant Inquiry into the Applicable Choice of Law

Koch filed the case in Mississippi federal court on diversity grounds, but no party is a Mississippi citizen. Koch has its principal place of business in Illinois. (Koch is the majority member of Koch Foods of Mississippi, LLC, which sold the poultry to Dawson.) The officers all live in North Carolina, which was also Dawson’s principal place of business.

The court’s first order of business was to discern what state’s law applies to the claim for unfair trade practices. To do that, the court turned to Mississippi’s conflict-of-law rules.

For claims for unfair trade practices, Mississippi law applies the “most significant relationship” test. (Notably, two recent decisions in North Carolina—one from a federal district court, and one from the North Carolina Business Court—show that North Carolina’s choice-of-law regime is more likely to apply a different test, the lex loci test, to claims for unfair trade practices.)

Under the “most significant relationship” test, as it applies under Mississippi law, the court turned to the following four factors to discern which state’s law has the most significant relationship to the relevant conduct and the parties:

the place where the injury occurred;

the place where the conduct that caused the injury occurred;

the domicile, residence, nationality, place of incorporation, and place of business of the parties; and

the place where the relationship between the parties is centered.

The “most significant relationship” test then calls for the evaluation of these contacts in light of seven more choice-of-law considerations. These considerations include “the needs of the interstate and international systems” and “the protection of justified expectations.”

Having laid out these “guideposts”—some of which the court itself described as “nebulous”—the court placed the most weight on the second factor: the place where the conduct that caused the injury occurred. That conduct occurred in North Carolina. The court concluded that North Carolina’s interest in regulating the conduct within its borders outweighed any policy or interest of Mississippi.

Would the lex loci test have yielded the same result? It’s not clear. As the Business Court recently explained, the place that a plaintiff suffered its pecuniary loss is not necessarily where the plaintiff has its principal place of business.

A Dispute of Facts

Having concluded that the law on section 75-1.1 applies to Koch’s claims, the court reasoned that buying $3.6 million of a product without the means or intent to pay for it violates section 75-1.1.

This conclusion, however, did not mean that the court granted offensive summary judgment in Koch’s favor. The parties had conflicting facts about whether Dawson actually lacked the means or intent to pay for the poultry products, and a jury must resolve that factual dispute.

Considerations for 75-1.1 Claims Concerning Multistate Conduct

Koch Foods is an instructive case for litigators and businesses involved in claims of unfair trade practices that cross state lines.

First, in litigation on unfair trade practices, the choice of forum matters. In Koch Foods, the viability of a claim for unfair trade practices required a forum in which section 75-1.1—because its reach is not limited to consumer transactions—would apply. Mississippi’s choice-of-law regime, which applies the “most significant relationship” test, led to that outcome.

Second, Koch Foods is another data point that emphasizes that the facts concerning contract formation can be a fertile area for proving “substantial aggravating circumstances.”

Finally, the court’s ultimate ruling—that a trial is needed to determine Dawson’s financial condition and intent during contract formation—underscores the role of the factfinder in section 75-1.1 litigation. Even though whether a set of facts actually violates section 75-1.1 is a legal question, each litigant must be ready to persuade a factfinder that its set of facts constitutes the truth.

]]><p>The past year has seen several notable decisions concerning how choice-of-law regimes can affect the viability of a claim for violation of N.C. Gen. Stat. § 75-1.1. Today’s post involves another case on this topic. In Koch Foods, Inc. v. &#8230; <a href="http://www.unfairtradepracticesnc.com/playing-chicken-claims-unfair-trade-practices/">Continue reading <span class="meta-nav">&#8594;</span></a></p>
<p>The post <a rel="nofollow" href="http://www.unfairtradepracticesnc.com/playing-chicken-claims-unfair-trade-practices/">Playing Chicken with Claims for Unfair Trade Practices</a> appeared first on <a rel="nofollow" href="http://www.unfairtradepracticesnc.com">What&#039;s Fair?</a>.</p>http://www.unfairtradepracticesnc.com/playing-chicken-claims-unfair-trade-practices/feed/0http://www.unfairtradepracticesnc.com/playing-chicken-claims-unfair-trade-practices/Unfair and Deceptive Trade Practices Claims in Data-Breach Lawsuitshttp://feedproxy.google.com/~r/NCUTPBlog/~3/Yca306_oOZg/Unfair Trade PracticesAlex PearceTue, 21 Nov 2017 04:55:11 PSThttp://www.unfairtradepracticesnc.com/?p=1590Section 5 of the Federal Trade Commission Act provides a powerful tool for the federal government to regulate companies’ data-security practices. Rather than adopt specific data-security standards, the FTC often uses Section 5’s flexible and open-ended concepts of unfairness and deception to bring enforcement actions against companies for data-security failures.

The FTC treats these enforcement actions as a form of “common law” that tells other companies what data-security practices Section 5 requires.

While it gives the FTC broad authority, Section 5 lacks a private right of action. Does this absence preclude a plaintiff in a data-breach lawsuit from nonetheless relying on the data-security “common law” developed by the FTC under Section 5?

A recent decision from a federal court in the state of Washington explored this question. This post studies two aspects of that decision, named Veridian Credit Union v. Eddie Bauer:

Can the failure to employ data-security measures that the FTC says are required by Section 5 be treated as evidence of a defendant’s negligence?

Can a plaintiff assert an unfairness claim for treble damages under a state’s “Little FTC Act” based on a defendant’s failure to employ FTC-mandated data security measures?

Veridian—a credit union whose cardholders shopped at affected stores and had their information stolen—sued Eddie Bauer for failing to prevent the breach. Eddie Bauer’s lax data security practices, Veridian alleged, caused it damages including the costs to cancel and reissue affected cards and to refund cardholders for unauthorized charges.

Veridian’s complaint asserted a common-law negligence claim. For the “duty” element of that claim, Veridian alleged that Section 5 required Eddie Bauer to use reasonable data-security measures. To that end, Veridian pointed to orders issued by the FTC against other companies for failing to secure payment-card data, and to the informal guidance contained in the FTC publication “Protecting Personal Information: A Guide for Business.”

Veridian also asserted a claim under Washington’s Consumer Protection Act (“CPA”). That statute, like Section 5, broadly prohibits unfair or deceptive acts and practices. It also allows courts to award treble damages to private plaintiffs. According to Veridian, Eddie Bauer’s failure to employ security measures that the FTC has said are required by Section 5 was also an “unfair” practice under the CPA.

As to the negligence claim, Eddie Bauer argued that it owed Veridian no duty to secure its customers’ payment-card data. Section 5 could not be the source of any such duty, Eddie Bauer contended, because Congress didn’t intend for the statute to protect parties in Veridian’s position.

As for Veridian’s CPA claim, Eddie Bauer observed that “unfairness” requires a showing that a defendant’s conduct was “likely to cause substantial harm” that consumers could not reasonably avoid. The company then argued that being victimized by cyberattack did not satisfy this test, for two reasons:

the consumers suffered harm owing to the theft of payment-card information, not any failure by Eddie Bauer to properly secure that information; and

the consumers could avoid any risks posed by the company’s data-security practices by paying with cash instead of credit cards.

The Court’s Decision

The court denied Eddie Bauer’s motion as to both claims.

The court agreed with Eddie Bauer that Veridian’s common-law negligence claim could not rest on a violation of Section 5. Under Washington law, the violation of a statute can be evidence of negligence—but only if the statute was intended to protect a class of persons that includes the plaintiff. In this case, Congress enacted Section 5 to protect a business’s consumers and competitors from unfair trade practices. Veridian was neither.

Despite this conclusion, the court allowed Veridian’s negligence claim to proceed. The reason? A different Washington state statute supplied the requisite duty. That statute requires a business to reimburse financial institutions for the cost to reissue payment cards if the business has failed to use reasonable care, and that failure causes a breach.

As to the CPA claim, the court rejected Eddie Bauer’s argument that being victimized by a data breach was not an “unfair” practice because the real harm to consumers flows from the acts of a malicious third party.

The court first observed that the Washington legislature modeled the CPA on Section 5 and specifically intended the CPA to be interpreted in light of FTC orders. Pointing to the FTC’s data-security cases against LabMD and Wyndham Hotels, Veridian had shown that the FTC had concluded that failing to properly secure payment-card data could be an unfair practice.

For this reason, Eddie Bauer should have foreseen that failing to secure payment-card data could substantially injure consumers. The fact that the attackers also caused the injury was immaterial: under Section 5 (and thus the CPA), an unfair practice need not be the only cause of the harm.

The court also had sharp words for Eddie Bauer’s “the consumers could have used cash” argument. As the court pointed out, the use of credit and debit cards is “ubiquitous” in all types of commerce. And when deciding how to pay, customers would have no way of knowing that Eddie Bauer’s payment-card security measures were deficient. Because of these points, the court characterized the argument as “disingenuous.”

Avoiding Liability: Keep An Eye on the FTC

Veridian suggests that the FTC’s aggressive use of its unfairness authority under Section 5 to regulate data security may have another unexpected consequence for companies. Private plaintiffs—including in business-to-business data-breach lawsuits—can look to the FTC’s enforcement actions to establish a claim under state laws that regulate unfair and deceptive trade practices.

The prospect of treble damages under these laws gives companies another reason to stay current on the FTC’s developing body of data security “common law.”

One recognized exemption is for internal business disputes: that is, conduct among members of the same business.

A recent decision by the North Carolina Business Court addressed this important exemption. In Chisum v. Campagna, the plaintiff tried to sidestep the exemption by alleging that his section 75-1.1 claim involved not only owners of the same business, but also several third-party companies.

Did that allegation bring the claim within the statute’s ambit? This post examines the Court’s analysis and conclusion.

A membership dispute

Dennis Chisum was a commercial real estate developer in the Wilmington area. In the 1990s, he teamed up with fellow Wilmington developers, and father and son, Rocky and Rick Campagna. The three formed several LLCs to develop land in and around Wilmington.

Chisum alleged that, beginning in 2007, the Campagnas started a campaign to squeeze Chisum out of the LLCs. The campaign allegedly included “sham” capital calls, designed to dilute his interest in each company. According to Chisum, he never received notice of the capital calls, and the Campagnas also held member meetings without him. Through these capital calls and meetings, the Campagnas purported to cut Chisum’s ownership in each company in half.

Chisum further alleged that the Campagnas engaged in self-interested transactions, including (a) diverting opportunities to themselves or other entities they controlled, (b) selling the companies’ assets without Chisum’s knowledge or approval, and (c) failing to pay Chisum his proper share of the assets.

Chisum’s complaint included a section 75-1.1 claim. The defendants moved to dismiss that claim.

Conduct does not become less “internal” to a business simply because the conduct benefits third parties

Judge McGuire noted that the Campagnas’ allegedly wrongful conduct involved intracorporate actions. This conduct included the “sham” capital calls, a fraudulent attempt to amend an operating agreement, and the Campagnas’ conversion of Chisum’s membership interests.

That alleged conduct, Judge McGuire explained, did not affect any other market participants; the conduct only affected the co-owners of the businesses. To confirm this conclusion, Judge McGuire cited White v. Thompson, 364 N.C. 47, 52, 691 S.E.2d 676, 679 (2010). In White, the Supreme Court held that section 75-1.1 does not regulate the “internal conduct of individuals within a single market participant,” which the court defined as a “single business.”

While the exemption clearly captured these allegations, Chisum’s other allegations required a deeper analysis. Chisum alleged that the Campagnas had diverted assets and opportunities away from the Chisum-associated LLCs and into other companies that the Campagnas controlled. Chisum argued that the exemption did not apply to these actions because the actions involved third parties—namely, companies that the Campagnas alone controlled.

Here, Judge McGuire drew a line: he reasoned that the mere involvement of a third party was not enough, and that the allegedly unfair or deceptive conduct must actually be directedtoward the third party to affect commerce.

Judge McGuire then applied that rule. Chisum alleged that the Campagnas directed the unfair conduct toward the Chisum-associated LLCs—and not toward any third-party companies. The conduct therefore constituted conduct internal to the businesses that Chisum owned with the Campagnas. Critically, the fact that third-party companies benefitted from the allegedly wrongful conduct did not, by itself, mean that the Campagnas directed their conduct toward those companies.

Overcoming the exemption

The exemption for internal business disputes often sounds the death knell for section 75-1.1 claims. The decision in Chisum adds another data point to this conclusion. As Chisum reveals, the exemption can apply even when internal conduct benefits a third party.

]]><p>The reach of N.C. Gen. Stat § 75-1.1 extends to conduct “in or affecting commerce.”&#160;Although this phrasing seems broad, courts&#160;interpreted&#160;it to exempt several&#160;types of conduct from the statute’s purview.&#160; One recognized exemption is for internal business disputes: that is, conduct&#160;among &#8230; <a href="http://www.unfairtradepracticesnc.com/internal-business-disputes-third-parties-section-75-1-1/">Continue reading <span class="meta-nav">&#8594;</span></a></p>
<p>The post <a rel="nofollow" href="http://www.unfairtradepracticesnc.com/internal-business-disputes-third-parties-section-75-1-1/">Internal Business Disputes, Third Parties, and Section 75-1.1</a> appeared first on <a rel="nofollow" href="http://www.unfairtradepracticesnc.com">What&#039;s Fair?</a>.</p>http://www.unfairtradepracticesnc.com/internal-business-disputes-third-parties-section-75-1-1/feed/0http://www.unfairtradepracticesnc.com/internal-business-disputes-third-parties-section-75-1-1/The North Carolina Business Court Explores the Boundaries of “Substantial Aggravating Circumstances”http://feedproxy.google.com/~r/NCUTPBlog/~3/b4gg11QBd9Q/Unfair Trade PracticesGeorge SandersonTue, 24 Oct 2017 04:55:30 PDThttp://www.unfairtradepracticesnc.com/?p=1575Courts have long recognized limitations on claims brought under N.C. Gen. Stat. § 75-1.1 in conjunction with alleged breaches of contract. Although the North Carolina Supreme Court has never formally recognized a restriction, state and federal courts alike have determined that a breach of contract does not give rise to an unfair or deceptive trade practice claim unless “substantial aggravating circumstances” accompany the breach.

Courts have provided little guidance on what counts as a substantial aggravating circumstance, though some cases suggest there needs to be a showing of deceptive conduct. Courts usually focus on whether the specific fact pattern at hand discloses “egregious” or “substantially aggravating” conduct.

In a recent decision, however, North Carolina Business Court Judge Adam M. Conrad surveys several 75-1.1 cases that involve an alleged breach of contract. In examining the cases, Judge Conrad makes some helpful observations about what type of conduct courts do and do not recognize to be substantially aggravating.

The depth of analysis in Judge Conrad’s opinion appears to be unique among decisions that examine the intersection of 75-1.1 and breach-of-contract claims. As such, the opinion is a critical read for all North Carolina business litigators.

Questions About the Buyer’s Post-Closing Accounting

Post v. Avita Drugs, LLC involves the sale of MedExpress. MedExpress was a successful pharmacy based in Salisbury, North Carolina. MedExpress’s shareholders sold the business to Avita Drugs.

A stock purchase agreement governed the terms of the sale. Avita paid $6 million for MedExpress at closing. The stock purchase agreement also provided for a deferred payment of up to $5.5 million. The actual amount of the deferred payment was to be determined under a formula in the stock purchase agreement. The formula was tied to the financial performance of MedExpress during the one-year period after the sale.

After the sale of MedExpress closed, the shareholders and Avita were unable to agree on the deferred payment amount. One of the shareholders ultimately sued Avita.

In his complaint, the shareholder alleged that Avita took a series of wrongful actions after the sale closed, including: (1) improperly adjusting the earnings calculation for MedExpress; (2) making retroactive adjustments to MedExpress’s books and records; and (3) failing to operate MedExpress as a separate company in the manner that the stock purchase required. The shareholder alleged that these actions improperly depressed the earnings calculation used to set the deferred payment amount.

The shareholder brought breach-of-contract claims under the stock purchase agreement and a 75-1.1 claim.

Avita moved to dismiss the 75-1.1 claim. The Court granted the motion on the basis that the shareholder failed to allege sufficient substantial aggravating circumstances. Judge Conrad’s opinion went into great detail about the policies driving the substantial aggravating circumstances doctrine.

Judge Conrad first noted the high frequency of 75-1.1 claims in North Carolina business litigation. Citing Matt Sawchak’s article in the University of North Carolina Law Review about direct-unfairness claims, Judge Conrad hypothesized that the reason for the proliferation of 75-1.1 claims is chiefly economic. He observed that a successful 75-1.1 claimant is entitled to treble damages and, in certain instance, reasonable attorneys’ fees.

Judge Conrad contrasted the “potent and credible” threat of a treble-damages recovery with the purpose of damages recoveries generally for breaches of contract. Ordinarily, punitive damages are not recoverable for a contract breach under North Carolina law. By extension, Judge Conrad proffered that 75-1.1 claims that “piggyback” on breach-of-contract claims are disfavored by North Carolina state and federal courts.

Judge Conrad theorized that the prospect of damage recoveries that are disproportionate to the amounts involved in the underlying contract may cause uncertainty for contracting parties. That uncertainty could possibly increase transaction costs incurred in contractual negotiations.

Judge Conrad examined several cases in which a 75-1.1 claim involved a contract. He concluded that most substantial aggravating circumstances (1) are attendant to the formation of the contract, and (2) are some variety of a fraud-in-the-inducement claim. He also noted that it appears “far more difficult to allege and prove egregious circumstances after the formation of the contract.”

Judge Conrad also cited a line of cases that indicate that a 75-1.1 violation “is unlikely to occur during the course of contractual performance.” Based on the case law, Judge Conrad opined that “efforts to encourage” continued contractual performance while “planning to breach” do not rise to the level of aggravating circumstances.

Judge Conrad’s case review did disclose a narrow band of post-formation conduct sufficient to trigger 75-1.1 liability. He cited instances of “clear deception” such as “forging and destroying documents” and “concealment of a breach” combined with “acts to deter further investigation” as actionable conduct.

Regarding the facts at hand, Judge Conrad did not find Avita’s alleged conduct to be sufficiently egregious or aggravating for the plaintiff to maintain a 75-1.1 claim. All of Avita’s alleged wrongful conduct occurred post-closing.

The judge also emphasized that each of Avita’s wrongful acts alleged was subject to an express provision of the stock purchase agreement. As such, he determined that the stock purchase agreement, and not section 75-1.1, defined the parties’ rights and obligations.

A Guide for Future Breach of Contract Cases?

One of the main purposes of the establishment of the North Carolina Business Court was to encourage the development and definition of business law in North Carolina. In keeping with that mandate, Judge Conrad’s opinion is a commendable attempt to provide definition to the concept of substantial aggravating circumstances not previously undertaken. It will be interesting to see how other courts use this framework in subsequent 75-1.1 decisions that involve a breach of contract.

]]><p>Courts have long recognized limitations on claims brought under N.C. Gen. Stat. § 75-1.1 in conjunction with alleged breaches of contract. Although the North Carolina Supreme Court has never formally recognized a restriction, state and federal courts alike have determined &#8230; <a href="http://www.unfairtradepracticesnc.com/north-carolina-business-court-explores-boundaries-substantial-aggravating-circumstances/">Continue reading <span class="meta-nav">&#8594;</span></a></p>
<p>The post <a rel="nofollow" href="http://www.unfairtradepracticesnc.com/north-carolina-business-court-explores-boundaries-substantial-aggravating-circumstances/">The North Carolina Business Court Explores the Boundaries of “Substantial Aggravating Circumstances”</a> appeared first on <a rel="nofollow" href="http://www.unfairtradepracticesnc.com">What&#039;s Fair?</a>.</p>http://www.unfairtradepracticesnc.com/north-carolina-business-court-explores-boundaries-substantial-aggravating-circumstances/feed/0http://www.unfairtradepracticesnc.com/north-carolina-business-court-explores-boundaries-substantial-aggravating-circumstances/The Government Can Sue for a Privacy or Data-Security Violation. What Are the Limits of that Government Power?http://feedproxy.google.com/~r/NCUTPBlog/~3/Mr-oRgEvnO8/Unfair Trade PracticesAlex PearceTue, 17 Oct 2017 04:55:03 PDThttp://www.unfairtradepracticesnc.com/?p=1561Consumers and businesses aren’t the only sources of potential privacy and data-security litigation. Today’s post looks at another important source: the Federal Trade Commission and state consumer-protection regulators.

In many cases, government enforcers don’t have express authority to sue for “privacy” or “data security” violations. Instead, the FTC often sues based on its authority under Section 5 of the FTC Act, which prohibits unfair or deceptive acts and practices. State enforcers invoke their authority under Section 5’s state-law analogues, like N.C. Gen. Stat. §75-1.1. The enforcers argue that the failure to protect consumers’ sensitive data constitutes an “unfair” business practice.

A new decision from a federal court in California, called FTC v. D-Link Systems, explores the limits of this theory. This post discusses two specific issues from D-Link:

Can the FTC use its “unfairness” authority under Section 5 to regulate companies’ data security practices?

Can an “unfairness” claim lie under Section 5 without an allegation that consumers suffered either (a) monetary loss or (b) actual disclosure of their sensitive personal data?

The Best Possible Security?

D-Link Systems sold routers and internet-connected security cameras and video baby monitors. D-Link’s marketing materials and user manuals touted the products’ security features. The materials said that the products included “the latest wireless security features to help prevent unauthorized access” and “the best possible encryption.”

Not so, according to the FTC. The Commission claimed the software for D-Link’s products had clear security flaws—flaws that allowed attackers to access the devices over the Internet and to observe consumers through their cameras, or to steal sensitive information stored on a consumer’s home network.

The FTC sued D-Link, alleging (among other claims) that D-Link’s failure “to take reasonable steps to secure the software” for their routers and cameras amounted to an “unfair” act or practice that violated Section 5. Notably, the FTC did not allege that any consumer had actually been spied on or had their data stolen—just that those harms could result from the security flaws in D-Link’s products.

First, D-Link generally objected to the FTC’s use of its unfairness authority to regulate data security. According to D-Link, “Section 5 says nothing about data security,” and “[i]f Congress wanted the FTC to regulate data security for the entire economy, it would have clearly said so.” Even if Section 5 gave the FTC the authority to regulate data security, D-Link argued, the FTC had not given D-Link fair notice—through the formal adoption of clear standards—of “what data-security practices for routers and IP cameras the FTC believes Section 5 to prohibit or to require.”

Second, D-Link argued, the FTC had failed to adequately allege that D-Link’s practices in this case caused or were likely to cause substantial injury to consumers—a necessary element of an unfairness claim under Section 5. The statute, said D-Link, required the FTC to allege actual physical or monetary harm to identifiable consumers.

It Means What We Say It Means

The court rejected out of hand D-Link’s general challenge to the FTC’s unfairness authority. It explained that “unfairness” was “by its very nature, a flexible concept with evolving content.” That data security was not expressly enumerated in Section 5 thus did not affect the FTC’s ability to exercise its authority to regulate companies’ data security practices. In that regard, the court cited approvingly toFTC v. Wyndham Worldwide Corp., a Third Circuit case from 2015 that rejected the same argument.

The court also rejected D-Link’s “fair notice” argument. Even though adopting specific data-security standards might in theory be “an optimal way” for the FTC to proceed, said the court, the law did not require this as a precondition for bringing an enforcement action. Rather, the FTC had discretion to proceed through individual, ad hoc litigation. And in the court’s view, that approach was especially appropriate in the realm of data security: “data security is a new and rapidly developing facet of our daily lives, and to require the FTC in all cases to adopt rules or standards before responding to data security issues faced by consumers” would be impractical.

What’s the Harm?

The court agreed with D-Link, however, that the FTC had not adequately pleaded the “injury” element of its unfairness claim. According to the court, the FTC’s failure to allege facts showing that consumers suffered a monetary loss, or had their sensitive personal data accessed or exposed, was fatal to the FTC’s claim. The absence of such facts, despite the FTC undertaking a thorough investigation, indicated that it was just as possible that D-Link’s devices were not likely to substantially harm consumers.

The court therefore dismissed the unfairness claim, but then gave the FTC leave to amend—and a roadmap on how to avoid dismissal the second time around.

According to the court, rather than relying on the risk of future harm to consumers from a compromised device, the FTC might instead frame the “injury” to consumers as an overpayment for the devices themselves. The court explained that a consumer’s purchase of a device that was not reasonably secure—let alone as secure as advertised—would be “in the ballpark” of a substantial injury, particularly if that injury were suffered by a large group of consumers.

Lessons for Companies

D-Link contains some important lessons for companies.

First, the decision confirms that the FTC can use its unfairness authority under Section 5 to regulate data security, and that it can use ad hoc enforcement actions rather than formally-adopted rules and standards. Absent such rules or standards, companies would be well-advised to stay abreast of the informal guidance that the FTC makes available on its website and Business Blog, and of the actions that it brings against other companies.

Second, the court’s invitation for the FTC to amend its unfairness claim to focus on consumers’ purchase of devices they expected to be secure may lead regulators, just like consumers, to use “overpayment” theories to avoid dismissal of data-security lawsuits.

]]><p>Consumers and businesses aren’t the only sources of potential privacy and data-security litigation. Today’s post looks at another important source: the Federal Trade Commission and state consumer-protection regulators. In many cases, government enforcers don’t have express authority to sue for &#8230; <a href="http://www.unfairtradepracticesnc.com/government-can-sue-privacy-data-security-violation-limits-government-power/">Continue reading <span class="meta-nav">&#8594;</span></a></p>
<p>The post <a rel="nofollow" href="http://www.unfairtradepracticesnc.com/government-can-sue-privacy-data-security-violation-limits-government-power/">The Government Can Sue for a Privacy or Data-Security Violation. What Are the Limits of that Government Power?</a> appeared first on <a rel="nofollow" href="http://www.unfairtradepracticesnc.com">What&#039;s Fair?</a>.</p>http://www.unfairtradepracticesnc.com/government-can-sue-privacy-data-security-violation-limits-government-power/feed/0http://www.unfairtradepracticesnc.com/government-can-sue-privacy-data-security-violation-limits-government-power/Section 75-1.1 and Trial Evidencehttp://feedproxy.google.com/~r/NCUTPBlog/~3/lXMOWAJccZY/Unfair Trade PracticesStephen FeldmanTue, 10 Oct 2017 04:55:15 PDThttp://www.unfairtradepracticesnc.com/?p=1555When a claim for violation of N.C. Gen. Stat. § 75-1.1 goes to trial, what analytical framework governs the admissibility of evidence related to that claim?

Today’s post studies a recent decision by Judge Louis A. Bledsoe, III in the North Carolina Business Court that raises this question.

The plaintiff, Insight, provided one of the defendants, Marquis Diagnostic Imaging of North Carolina (MDI), with a scanner, support staff, and related services. In exchange, MDI paid Insight a monthly fee. Insight and MDI entered the agreement in 2012.

Roughly one year later, MDI closed its doors and sold its assets to another company. MDI stopped using the scanner—and stopped paying Insight.

MDI realized $1.15 million from its asset sale. None of that $1.15 million was paid to Insight. Insight then sued MDI for breach of contract and violation of section 75-1.1.

MDI and its co-defendants responded with affirmative defenses and counterclaims related to negotiations between Insight and MDI that predated the 2012 lease agreement. In those negotiations, Insight showed interest in buying MDI’s assets. Negotiations continued through the middle of 2013, but ultimately failed.

MDI characterized the failed negotiations and the 2012 lease agreement as related events. Judge Bledsoe, however, concluded otherwise, and dismissed or entered summary judgment on the defenses and counterclaims related to the failed negotiations.

The case is now headed to a trial set for November 6. In connection with the trial, Insight filed a pretrial motion to bar MDI from introducing evidence or argument about the negotiations that led up to the failed asset purchase.

The Key to Admissibility? The Plaintiff’s 75-1.1 Theory

When it asked Judge Bledsoe to bar evidence of the failed negotiations, Insight relied on Rules 401 and 402 of the Rules of Evidence. Those rules require evidence to be relevant in order to be admissible.

The motion put the ball in MDI’s court. Because the Court had dismissed MDI’s counterclaims and affirmative defenses based on the failed negotiations, what relevance might evidence of the negotiations have on Insight’s claims?

MDI told Judge Bledsoe that evidence of the failed negotiations will give the jury context about MDI’s breach of the MRI agreement. More specifically, MDI seeks to convince the jury that MDI did not refuse to pay Insight in bad faith, but legitimately thought that it had a legal right not to do so.

MDI offered a second reason, as well: evidence of the negotiations will demonstrate to the jury MDI’s financial condition leading up to MDI’s breach of the MRI agreement.

To assess the admissibility of this evidence, Judge Bledsoe examined each of Insight’s claims—including, and especially, Insight’s claim for violation of section 75-1.1.

Judge Bledsoe first referred to the general rule that a defendant’s good faith is not a defense to an alleged violation of section 75-1.1.

Judge Bledsoe then noted that this rule has exceptions. Citing the North Carolina Supreme Court’s 2013 decision in Bumpers v Community Bank of Northern Virginia, Judge Bledsoe observed that section 75-1.1 claims “can be, and are, based upon a wide set of facts and circumstances.”

The spectrum of claims, Judge Bledsoe pointed out, includes theories that make a defendant’s motives relevant. He offered an example to prove the point:

A defendant’s state of mind may be relevant to whether a defendant forged a document or made a misrepresentation.

In sum, a plaintiff can choose a 75-1.1 theory that involves facts about a defendant’s motives. When a plaintiff does so, Judge Bledsoe concluded, a defendant should be allowed to introduce evidence “that tends to show the absence of those same facts.”

Against this backdrop, Judge Bledsoe observed that the theory behind Insight’s section 75-1.1 claim “is not yet concrete.” He also observed that the aspects of the claim that have survived to trial relate to Insight’s breach-of-contract claim. If Insight argues a “substantial aggravating circumstances” theory to support the section 75-1.1 claim at trial—and tries to prove up that theory with evidence of MDI’s improper motive or intent—then MDI should be able to rebut that evidence with evidence of the failed negotiations and failed asset purchase.

Because Insight’s arguments and intentions remain unclear, Judge Bledsoe deferred ruling on admissibility. His opinion, however, forecasted how he will approach evidentiary questions on the 75-1.1 claim at trial.

On the Defendant’s Trial Evidence, Begin with the End in Mind

The Insight decision provides at least two important takeaways for North Carolina business litigators.

Second, the relevant 75-1.1 theory provides a roadmap not only to the evidence that the plaintiff will need to support the theory, but also to the evidence that might be available to the defendant to disprove the claimant’s evidence.

This means that, if you represent a defendant, discerning a plaintiff’s 75-1.1 theory is a top priority. It also means that, if you represent a plaintiff, careful thinking is warranted to identify precisely what type of evidence you might be putting into issue based on your 75-1.1 theory.

In a recent case in the North Carolina Business Court involving section 75-1.1 claims, Judge Michael L. Robinson requested supplemental briefing on the economic-loss doctrine.

Judge Robinson’s sua sponteorder was followed by his application of the doctrine to the plaintiff’s claims on the defendants’ summary judgment motion. This post examines Judge Robinson’s decision and its result that dismissed several claims based on the doctrine but allowed others to proceed.

In October 2014, Amiel Rossabi (a lawyer) and Rocco Scarfone planned to purchase an aircraft to place into service as a charter jet through a federal program known as Part 135 that allows owners to generate profits from its use as a for-hire charter plane. But the aircraft has to meet certain standards to qualify under Part 135.

Rossabi and Scarfone settled on a 1976 Cessna 421C twin-engine propeller aircraft. They formed Carmayer LLC to buy the plane.

Early in their search, Rossabi and Scarfone were introduced to the defendants—a North Carolina company, its President, and its Director of Maintenance—as experts in the Part 135 process. The defendants wore several hats in the Carmayer plan:

Carmayer sought advice from the defendants on the purchase.

Carmayer sought advice on bringing the plane into compliance with the Part 135 program.

Carmayer later signed a lease with the defendants to facilitate the charter of the Cessna 421C under Part 135 as part of the defendants’ fleet.

Under the lease agreement, the defendants would also be responsible for monitoring the mechanical condition of the plane and advising Carmayer on the status of all scheduled maintenance, inspections, and overhaul of the plane.

But Carmayer’s plans quickly experienced turbulence. The aircraft did not qualify under Part 135 and would require extensive maintenance to qualify. Carmayer eventually took the plane from the defendants to get a second opinion, and learned there were 172 problems with the plane. Today, Carmayer believes the plane may never qualify for the Part 135 program.

In their answer, the defendants’ affirmative defenses included the economic-loss doctrine. After discovery, however, they did not raise the doctrine in the briefing on their motion for summary judgment.

After a hearing on the motion, Judge Robinson issued his sua sponte order that requested additional briefing on the economic-loss issue.

Apparently sensing which way the wind was blowing, Carmeyer asked Judge Robinson for leave to file an amended complaint to add a contract claim—after the briefing process on the economic loss doctrine had been completed but before Judge Robinson ruled. Judge Robinson denied that request because Carmeyer had delayed in seeking leave to amend, and could have asserted the breach of contract as an alternative claim in its original pleading.

Splitting Airs

Judge Robinson began his analysis by separately evaluating each of the alleged negligent misrepresentations.

First, Judge Robinson relied on the economic loss doctrine in dismissing claims that post-dated the parties’ lease agreement regarding the airworthiness of the plane and the potential to add it to the defendants’ fleet. Judge Robinson found that these claims were all barred by the economic-loss doctrine. The agreement governed the defendants’ duty to advise Carmeyer on the plane’s condition and certification status, and there was no evidence of a separate and distinct duty to maintain the plane or add it to the defendants’ fleet.

But Judge Robinson allowed two other negligent-misrepresentation claims to proceed. Both claims involved representations made prior to the purchase of the plane and the parties signed the lease agreement.

The first was premised on a representation that one of the defendants was an expert on chartering aircraft under Part 135. Judge Robinson cited Scarfone’s affidavit testimony that the defendants had represented that the President was an expert in the process. Judge Robinson also cited the President’s testimony that he did not know how to get Part 135 approval. Judge Robinson dismissed other similar claims regarding the Director of Maintenance and the company itself, because those statements were made with reasonable care.

The other claim was based on pre-agreement representations that the defendants knew what was required to make the plane Part 135-compliant. Judge Robinson cited a conflict of testimony regarding whether the plane needed to be maintained pursuant to the factory recommendations to be eligible for Part 135. The Director of Maintenance testified that such maintenance was not required, while the company that gave the second opinion on the plane testified that it was required. Judge Robinson found that there was a material issue of fact on this point, and denied summary judgment.

Judge Robinson also dismissed the fiduciary duty claims, finding there was no fiduciary duty between the parties.

Negligent Misrepresentation Equals Chapter 75

Judge Robinson then addressed the section 75-1.1 claims. The complaint was thin on substance for these claims. Carmeyer instead just tied the claim to the negligent misrepresentation and breach of fiduciary duty claims.

As a result, Judge Robinson did not deeply analyze the section 75-1.1 allegations. Instead, he allowed the misrepresentation-based claims to proceed based on the two negligent misrepresentation claims that survived summary judgment.

Lessons for Litigants

The order in Carmeyer is an important read for North Carolina business litigators.

Carmeyer shows that, even after a defendant successfully shows that the economic-loss doctrine bars a claim for violation of section 75-1.1, the application of the doctrine might vary depending upon the timing and substance of the relevant conduct.

There’s another lesson in Judge Robinson’s denial of the motion to amend: a party cannot avoid the economic-loss doctrine simply by not pleading a valid contract claim. The Court’s denial of the motion to amend here could have been far more consequential if the Court had also dismissed the other tort claims.

]]><p>We’re not alone in our interest in how the economic-loss doctrine applies to alleged violations of N.C. Gen. Stat. § 75-1.1.&#160; In a recent case in the North Carolina Business Court involving section 75-1.1 claims, Judge Michael L. Robinson requested &#8230; <a href="http://www.unfairtradepracticesnc.com/economic-loss-rule-misrepresentation-based-section-75-1-1-claims/">Continue reading <span class="meta-nav">&#8594;</span></a></p>
<p>The post <a rel="nofollow" href="http://www.unfairtradepracticesnc.com/economic-loss-rule-misrepresentation-based-section-75-1-1-claims/">The Economic Loss Rule and Misrepresentation-Based Section 75-1.1 Claims</a> appeared first on <a rel="nofollow" href="http://www.unfairtradepracticesnc.com">What&#039;s Fair?</a>.</p>http://www.unfairtradepracticesnc.com/economic-loss-rule-misrepresentation-based-section-75-1-1-claims/feed/0http://www.unfairtradepracticesnc.com/economic-loss-rule-misrepresentation-based-section-75-1-1-claims/Defending Breach-of-Contract Claims in Data-Breach Litigationhttp://feedproxy.google.com/~r/NCUTPBlog/~3/rCZl-XLbZrI/Unfair Trade PracticesAlex PearceTue, 19 Sep 2017 04:55:30 PDThttp://www.unfairtradepracticesnc.com/?p=1534We’ve previously discussed the “overpayment” theory of injury in data-breach litigation. This theory rests on the premise that the price of a product or service includes a payment for data security measures. When a data breach happens, buyers allege they have overpaid for the product or service because the seller failed to provide the agreed-upon measures.

Data-breach plaintiffs have successfully used this theory to overcome standing challenges brought by defendants under Rule 12(b)(1).

In that decision—a boon for data-breach defendants—the Eighth Circuit employed a demanding test for the pleading of facts that give rise to an overpayment claim.

Promises Made to Be Broken?

Kuhns v. Scottrade arose after hackers accessed the internal customer database of Scottrade, a securities brokerage firm. The hackers acquired sensitive personal information of over 4.6 million customers. They then used that personal information to operate a stock price manipulation scheme, illegal gambling websites, and a bitcoin exchange.

The plaintiffs—Scottrade customers whose personal information was accessed by the hackers—sued Scottrade in federal court in Missouri. Their complaint asserted claims for breach of express and implied contract.

According to the plaintiffs, a portion of the fees they paid to Scottrade for brokerage services was to be used for data management and security. To that end, the plaintiffs pointed to representations that Scottrade made as part of their brokerage agreements.

Those agreements included a “Privacy and Security Statement” in which Scottrade represented that it would:

The plaintiffs alleged that the hack occurred because Scottrade didn’t live up to these promises.

For damages, the plaintiffs sought “the monetary difference between the amount paid for services as promised…and the services actually provided.”

The district court dismissed the complaint for lack of standing. It concluded that the plaintiffs’ “conclusory” allegations that they been deprived of the benefit of data management and security services they paid for when they opened their accounts did not constitute a sufficiently concrete injury.

Overpayment = Concrete Injury

On appeal, the Eighth Circuit rejected that analysis. The Eighth Circuit pointed to an earlier data-privacy decision involving claims premised on an overpayment theory. In that case, the court held that “a party to a breached contract has a judicially cognizable interest for standing purposes, regardless of the merits of the breach alleged.”

The Scottrade plaintiffs satisfied that test. Their complaint alleged that they bargained for and expected protection of their personal information, and suffered a diminished value of that bargain when Scottrade failed to prevent the data breach. Thus, the Eighth Circuit concluded, the plaintiffs had standing to assert the breach of contract claims, “whatever the merits” might be of those claims.

Show Me the Breach

As to the merits, Scottrade argued that even if the plaintiffs had standing, their contract claims that relied on the overpayment theory should still be dismissed under Rule 12(b)(6).

Scottrade argued that the plaintiffs did not allege any specific facts to establish that Scottrade breached its promises regarding data security. To that end, Scottrade observed, the plaintiffs hadn’t alleged any specific security measures that Scottrade had promised but failed to implement. Nor had they specified any particular laws with which Scottrade’s data security practices failed to comply.

Data Breach ≠ Contract Breach (necessarily)

The Eighth Circuit agreed with Scottrade.

It concluded that the plaintiffs had failed to allege any specific breach of the security representations in the brokerage agreement. To that end, the court observed that:

the plaintiffs did not identify any specific law or regulation that Scottrade’s data security practices violated; and

Scottrade never affirmatively promised that its customers’ data would not be hacked.

Acknowledging that the complaint presented the “possibility” of misconduct, the court nonetheless held that more was required: “It is possible that Scottrade breached the Brokerage Agreement, but we have no idea how.”

Critically, the court concluded that the mere fact that data breach occurred could not supply the requisite factual basis for the breach of contract claims. It explained that “the implied premise that because data was hacked Scottrade’s protections must have been inadequate” amounted to a “naked assertion devoid of further factual enhancement” that could not survive a motion to dismiss under the Supreme Court’s ruling in Ashcroft v. Iqbal.

The court thus affirmed the district court’s dismissal of the action, albeit under Rule 12(b)(6) rather than Rule 12(b)(1).

Lessons for Litigants

The holding in Scottrade will be a welcome addition to data-breach defendants’ Rule 12(b)(6) arsenal.

It suggests that data-breach plaintiffs who rely on an “overpayment” theory must allege specific facts not only about the data security promises for which they paid, but also about the specific ways in which a defendant’s practices failed to live up to those promises.

And just as importantly, the decision makes clear that neither conclusory allegations of broken security promises, nor the mere fact of a data breach, are sufficient to satisfy that burden.

]]><p>We’ve previously discussed the “overpayment” theory of injury in data-breach litigation.&#160; This theory rests on the premise that the price of a product or service includes a payment for data security measures.&#160; When a data breach happens, buyers allege they &#8230; <a href="http://www.unfairtradepracticesnc.com/defending-breach-contract-claims-data-breach-litigation/">Continue reading <span class="meta-nav">&#8594;</span></a></p>
<p>The post <a rel="nofollow" href="http://www.unfairtradepracticesnc.com/defending-breach-contract-claims-data-breach-litigation/">Defending Breach-of-Contract Claims in Data-Breach Litigation</a> appeared first on <a rel="nofollow" href="http://www.unfairtradepracticesnc.com">What&#039;s Fair?</a>.</p>http://www.unfairtradepracticesnc.com/defending-breach-contract-claims-data-breach-litigation/feed/0http://www.unfairtradepracticesnc.com/defending-breach-contract-claims-data-breach-litigation/Does the Fair Credit Reporting Act Preempt State-Law Claims for Unfair and Deceptive Trade Practices?http://feedproxy.google.com/~r/NCUTPBlog/~3/DpMe4F-LNxY/Unfair Trade PracticesGeorge SandersonTue, 12 Sep 2017 04:55:45 PDThttp://www.unfairtradepracticesnc.com/?p=1521In cases that involve claims brought under North Carolina’s Unfair and Deceptive Trade Practices Act, an often overlooked issue is whether federal law preempts the 75-1.1 claim.

In a case of apparent first impression, a federal district court in North Carolina recently ruled that the federal Fair Credit Reporting Act (FCRA) can preempt a 75-1.1 claim, at least where there is no evidence that the defendant’s acts were willful or malicious.

Equifax doesn’t report the bankruptcy discharge of a consumer’s debt

Myrick v. Equifax Information Services, LLCinvolves a consumer whose obligations under a mortgage that had been discharged in bankruptcy. The consumer alleged that Equifax failed to properly report the status of the debt on the consumer’s credit report. Equifax was reporting that the consumer’s loan payments were past due, but did not note the discharge of the obligation.

The consumer disputed the report with Equifax through Equifax’s website. The consumer asserted that the credit report should reflect the discharge.

After Equifax received the dispute, Equifax contacted the bank that had extended the credit line and attempted to verify the status of the debt. The bank indicated that the consumer had an open account. The bank did not verify to Equifax that the account had been discharged. Equifax then informed the consumer that Equifax believed that the account reporting was correct.

Several months later, the consumer sent a dispute letter to Equifax. In the letter, the consumer reiterated that this debt had been discharged. The consumer also attached a copy of the bankruptcy court’s order of discharge. As is typical, the discharge order did not specifically identify the bank’s debt. The order further indicated that the bankruptcy had discharged at least some of the consumer’s debts, but may not have discharged all of them.

In response to the letter, Equifax requested that the consumer “be specific with [his] concerns by listing the names, numbers, and the nature of the dispute.”

The consumer sues Equifax for its reporting and dispute investigation procedures

The consumer did not provide the information requested. Instead, the consumer sued both the bank and Equifax in the United States District Court for the Eastern District of North Carolina. The lawsuit alleged that the companies violated both the FCRA and section 75-1.1.

The FCRA is a federal statutory scheme that governs the reporting of consumer debt. The FCRA imposes statutory duties on consumer reporting agencies about how they maintain and report consumer credit histories. The FCRA creates a private right of action, and provides for the recovery of actual damages, for the negligent or willful violation of any duty that the statute imposes. An aggrieved consumer can also recover punitive damages, but only if the consumer can prove that the reporting agency was willfully non-compliant.

After the consumer filed the lawsuit, the bank verified to Equifax that the debt had been discharged and settled with the consumer. The consumer and Equifax proceeded to litigate the matter. At the conclusion of discovery, Equifax moved for summary judgment.

Senior District Judge W. Earl Britt partially denied summary judgment as to the FCRA claims, but granted summary judgment to Equifax on the 75-1.1 claim.

The consumer alleged that Equifax violated the FCRA through both its procedures for preparing credit reports, and for conducting post-dispute investigations. As to its investigation, the consumer contended that Equifax had an independent duty to verify that the disputed debt had been discharged once Equifax received notice of the general bankruptcy discharge.

Judge Britt determined that the evidence was insufficient to make out a FCRA violation for Equifax’s original credit reporting, but denied summary judgment as to the FCRA claim premised on Equifax’s post-dispute investigation procedures. The judge did not believe that the consumer forecast sufficient evidence of willful non-compliance to take a punitive-damages claim to a jury.

In a decision of apparent first impression, Judge Britt determined that the FCRA preempted the 75-1.1 claim in this particular case because Equifax’s conduct was, at most, negligent. In his decision, Judge Britt referenced Congress’s intent to allow state-law claims only in very narrow circumstances. Because the consumer failed to forecast any malice or willful intent to injure by Equifax, the consumer could not maintain his state-law claim for unfair and deceptive trade practices.

Myrick is a reminder that plaintiffs and defendants alike should consider potential preemption arguments where federal statutes or regulations may also regulate conduct that allegedly violates section 75-1.1.